Bank stocks regain their appeal favor with Wall Street

BySharon Reier, Special to The Christian Science MonitorOctober 15, 1982

New York
— Just as individual depositors nearly panicked and contemplated pulling thier accounts out of some of the country's biggest banks, the investment community, paradoxically, has turned somewhat bullish on bank stocks.

Since August, as the bad news about Drysdale Securities, Lombard-Wall, Mexico , and Argentina snowballed, bank stocks have begun an upward climb. In an extreme case, Bankers Trust Company's stock has climbed as much as 37 percent since August, to its current yearly high of 36.

Explains Robert Mandle, vice-president and bank stock analyst at Paine Webber Mitchell Hutchins Inc.: ''Investors have decided that the catastrophe won't happen. The world didn't end after all.''

After the Drysdale debacle, he explains, bank stocks were very cheap, compared with other socks. Banks lagged the market in August, somewhat outperformed it in September, and have continued to outperform it again so far in October.

To understand why, Robert Planer, vice-president at Keefe, Bruyette &amp; Woods Inc., a Wall Street reasearch firm that concentrates on bank stocks, explains that the banks are now in the midst of their up-cycle. Contrary to the belief of perhaps a majority of people who expect the demise of a major bank momentarily, the Federal Reserve's loosening of the money supply and lowering of interest rates has been enough to widen bank margins on many types of loans, since the higher rates that banks charge for loans are supplied with cheaper dollars the banks borrow. Furthermore, Mr. Planer notes, the lowering of interest rates, including the prime rate, means that ''the banks now have better loans outstanding.''

Since corporations don't have to pay the heady 20 percent interest on loans they were paying earlier this year, they are more capable of repayment, and businesses stand a better chance of surviving. ''That means banks have better assets,'' Planer notes. (A bank's main assets are its loans.) ''The quality of loans has improved.''

All that theory contributes to Keefe, Bruyette's contention that banks' earnings will improve during the third quarter and will rise still more during the fourth. The firm estimates that earnings of the 24 banks it studies as a composite index (which includes the beleaguered Continental Illinois Bank) will climb an average of 7 to 8 percent for all of 1982. That is up respectably from Keefe, Bruyette's original estimate of a 5 to 7 percent earnings gain for this year, made before interest rates recently dropped. Next year, Planer adds, Keefe, Bruyette is looking for earnings gains of 8 to 10 percent for the bank group.

While the 1982 figures will look significantly better than gains in most other industries, Planer thinks, the 1983 gain may not seem ''so strong against the snapbacks expected in other cyclical stocks,'' he asserts. ''Bank stocks earnings are very stable. They have nearly always risen. But people pay for that stability in the price of the stock.''

The firm is recommending a number of bank stocks for investors to purchase these days. Included are Wells Fargo in San Francisco, Valley National in Arizona, Citizens &amp; Southern in Georgia, and First Union of North Carolina.

Mr. Planer says all were chosen ''on the basis of improving trends in retail profitability.'' The company is also positive on Citicorp, because ''it has worked out its problems and will do well in comparison to last year,'' he says.

In general, however, Keefe, Bruyette shuns money-center banks, playing them only as trading vehicles during their up-cycle. Planer explains: ''If you held Citicorp for the long term, you might have bought it at $27 back in 1975 and it is only $30 now. You would have lost money with inflation.''

But if Keefe, Bruyette is generally optimistic, it has not convinced its Wall Street colleagues. Many remain skeptical about how bank earnings will be affected by much-publicized bad-loan provisions.

Says a Merrill Lynch bank analyst, Frank Barkoci: ''Our overview on the group has been one of caution as to aggressive new broad-based investing. There is a general concern that earnings will remain under pressure, both in the third and fourth quarters, reflecting the recession and a significant increase in nonperforming assets.''

Mr. Barkoci expects those nonperforming assets for the most part to hit money-center banks - the big banks in New York, Chicago, and California - especially hard since, they are the largest lenders to sovereign credits like Mexico, Poland, and Costa Rica, which have been forced to reschedule debts. ''What if these problems can't be postponed and the losses have to be recognized and if these banks have to take the charge off?'' Barkoci asks.

Thus, in its investment recommendations Merrill Lynch has concentrated on regionals with what it terms high-quality loans. Included are Mellon Bank, Pittsburgh National Bank, North Carolina National Bank, and the Barnett Bank Group in Florida.

Such divisions as money-center banks and regionals, however, are dismissed as irrevelant by Robert Albertson, vice-president and bank analyst at Smith Barney, Harris Upham &amp; Co. ''Banks are going to lose more money on their domestic US loan portfolios than their overseas loans,'' he insists. ''Government lending, which for the most part is to sovereign credits (governments and their agencies) with some small exceptions, have no risk of losses. They are going to pay the full interest in most cases.'' Besides, Mr. Albertson reasons, ''Many regional banks have made loans to the same credits.''